North Dakota is at the center of a legal battle involving states’ efforts to regulate middleman entities that critics say help to drive up prescription drug costs and undermine pharmacies’ financial health.
The dispute — which has gone up to the U.S. Supreme Court and has been sent back to a federal appeals court for reconsideration — involves laws North Dakota passed in 2017 to regulate what are called pharmacy benefit managers, or PBMs.
The case is being closely watched by state regulators, the pharmacy industry and PBM industry as states have rolled out laws regarding the pharmacy benefit managers, which go largely unregulated by federal law.
North Dakota has emerged as a test case in states efforts’ to “curb the worst abuses” as Minnesota Attorney General Keith Ellison described it. Minnesota spearheaded a bipartisan brief by 34 states, also including South Dakota, in support of North Dakota’s PBM regulation laws.
“It’s pretty wide-reaching as far as its impacts on PBMs,” said Mark Hardy, president of the North Dakota Board of Pharmacy, which is a party in the lawsuit, along with the North Dakota Department of Health.
The North Dakota laws regulate certain fees PBMs charge pharmacies, what pharmacists can discuss with their patients, and which drugs pharmacists are authorized to dispense, among other provisions.
North Dakota allows pharmacists to provide “relevant information to a patient if the patient is acquiring prescription drugs,” including “the cost and efficacy of a more affordable alternative drug if one is available,” according to the state’s brief in the case.
Provisions of the North Dakota laws override “gag clauses” in PBM contracts that prevent pharmacists from alerting patients in situations where patients could save money by not processing the claim through the PBM.
Other provisions regulate the ability of PBMs to impose undisclosed fees, prevent PBMs from “clawing back” from pharmacies certain co-payments, and require PBMs to disclose information about their networks so pharmacies can make informed financial decisions before contracting with PBMs.
North Dakota was one of the first states to pass laws to regulate PBMs, although many states have passed similar laws, Hardy said. “Ours was kind of at the forefront,” he said. “That’s probably why it’s the next battleground.”
Pharmacy benefit managers are largely invisible to health care consumers but occupy an important middleman role in prescription drug transactions that critics say drives up costs. The entities are not part of health insurance plans but manage prescription drug benefits for health insurers.
“They kind of fly under the radar in prescription-drug pricing,” Hardy said.
The laws North Dakota passed in 2017 never went into effect because of the court challenge by the Pharmaceutical Care Management Association, a trade association that represents PBMs. “It’s just been tied up in the courts since its passage,” Hardy said.
In their early days, in the 1970s, PBMs played a limited role in the health care system, but their role has steadily increased over the past 50 years to control “nearly every aspect of health plans’ pharmacy benefits,” according to the brief in support of North Dakota’s law recently filed in the 8th Circuit U.S. Court of Appeals by Ellison.
“One of the biggest drivers of the high cost of pharmaceutical drugs is the abusive practices of pharmacy benefit managers,” Ellison said in a statement. “That’s why many states like Minnesota and North Dakota have taken common-sense first steps to regulate them. I led this coalition in support of North Dakota because I won’t stand by and let the PBM industry undo the progress we’ve made so far when so much needs to be done to make lifesaving drugs affordable to all Americans.”
In the brief, Ellison wrote: “PBMs have exploited decades of lax or non-existent regulation to become a massive part of the prescription medication industry. Because PBMs are essentially middlemen, their profits depend on reaping large fees and rebates while spending as little as possible to reimburse pharmacies for medications.”
The result, according to Minnesota’s brief, is lower reimbursement rates and higher drug prices, due to mechanisms operating “largely in the shadows.”
The lower reimbursements are characterized in Minnesota’s brief as “take it or leave it terms” given all but the largest pharmacies. About 16% of independently owned rural pharmacies closed between 2003 and 2018, Ellison wrote.
PBMs, because of their size and clout, are in a superior position to dictate terms that drive down reimbursements to pharmacies and steer business — as well as preferable terms — to pharmacies affiliated with the PBMs, Minnesota's brief asserts.
Minnesota has seen more pharmacies close in the last decade than any other state, the brief said.
PBMs administer prescription drug benefits for 266 million Americans. The trade group for PBMs, the Pharmaceutical Care Management Association, says PBMs will save health plan sponsors and consumers more than $1 trillion on prescriptions over 10 years.
The association also contends that PBMs save payers and patients 40% to 50% on prescription drug costs compared to what they would have paid.
PBMs account for 6% of net prescription drug costs, compared to 65% from the pharmaceutical manufacturers, according to the PBM association, which claims to save $10 in costs for every $1 spent on PBM services.
Over time, PBMs have become increasingly concentrated, with the largest three controlling 80% to 90% of the market. Every major health insurer now operates a PBM, according to the Minnesota brief.
Consumers pay more for prescription drugs because of PBMs, Ellison argued in the brief in support of North Dakota’s law, which includes increased transparency provisions, among other requirements. “Robust transparency regulations allow states to properly serve their regulatory function and give consumers data needed to make informed decisions,” Ellison wrote.
Since 2014, medical costs have risen by about 17%, while prescription-medication costs have increased by 33%, almost double the rate of health costs overall, according to the Minnesota brief. As a result of spiraling prescription drug costs, one third of consumers have skipped filling a prescription and 10% have reported rationing their medications.
North Dakota hopes the appeals judges will hear the case, which the trial court decided in North Dakota’s favor, by the end of the year, but the hearing could be moved into next year, Hardy said.